Calello added it was vital for all participants to know how to value risks and credit exposures, regardless of how fast the market changes or the increasing number of trades. In light of the recent turmoil, there have been widespread calls from regulators in the US and Europe for participants to provide timely and transparent data.
Calello agreed, adding: “If we have to create an industry utility to do it, so be it. We must have interoperability, automation, standardisation and disclosure – other markets do and it’s past time for derivatives.”
Citing the achievements of Isda in co-ordinating recent improvements in cash settlement protocols and novation protocols, Calello said the industry body “must be a central player in pressing for and helping to accomplish needed change”.
On the broader question of whether an end to the credit crisis is in sight, Calello said that, despite signs of credit risk appetite starting to return, he believes potential total losses could far exceed what has been reported so far. “The interdependence and interconnected markets that have built up create the risk of sending a chain reaction through the system,” he warned.
Overly complex structured products such as collateralised debt obligations (CDOs) of asset-backed securities have taken a hammering since the second half of last year. But it would be premature to herald the death of the asset class. “Simpler, less complex products may be the near-term future, but even so, structured products have a place in investors’ portfolios so long as the asset quality underlying is capable of being modelled and risk managed,” said Calello.